Congress, Obama Ready to Change Medicare

Here is one big surprise following President Obama's win over Republican nominee Mitt Romney: Medicare will play a central role in talks aimed at settling tax and spending issues before the U.S. plunges over the fiscal cliff.

Democrats have been mostly united in wanting to spare the program, which offers health care and drug coverage to older Americans. At the same time, Republicans have been reluctant to consider Obama's effort to raise tax rates for high earners.

So putting Medicare on the table, which the Obama administration has quietly done, means the sacred cows from both parties will be in play. That's a strong signal that Congress and the White House are serious about negotiating a grand bargain, if not in the lame-duck session now under way, then in the early months of the new session that gets started in January.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

Even if they're not part of a deal on the fiscal cliff, Medicare changes are coming. Delay will only put off the inevitable and add billions to costs. Program costs, already a big driver of federal spending, will continue to grow for years, from $519 billion in 2010 to $929 billion in 2020, and from 3.6% of GDP in 2010 to 5.1% of the economy in 2030. The number of beneficiaries will reach 80 million, from 47 million now, and the number of workers paying into the system will fall.

Here's what to expect when a Medicare deal is reached:

A pushed-back age for enrollment, to 67 from 65. This change won't apply to folks who are close to retirement -- most likely those who are 55 and older. It will phased in for others. At the end of the phase-in, the eligibility ages for Social Security and Medicare will match.

More means testing. Those with incomes over $85,000 -- twice that for couples -- already pay higher premiums for doctor coverage and the prescription drug program, and they'll probably be on the hook for even bigger payments. The new charges will be for new participants as well as for those who are already enrolled. It is possible, but not likely, that Congress will set a lower income for the higher costs to kick in rather than raise rates for those above the current limit.

Perhaps a higher copayment, meant to encourage shopping around for care.

Requiring drug makers to offer bigger discounts for prescription medications. The government could save $137 billion over 10 years if Medicare got the same markdown that the manufacturers give to Medicaid, which pays for health care for people with low incomes.

The formula for paying physicians will be changed to prevent cuts in service by doctors who threaten to stop seeing Medicare patients. The fix isn't likely to be permanent, but it will be long enough to prevent the year-to-year uncertainty that comes with short-term attempts to address the problem.

And here's one thing that won't happen: Vouchers that will allow participants to choose their own coverage. That Republican-backed trial balloon deflated quickly once Obama won a second term.

The timing is right for a big deal on the fiscal cliff, with Medicare, higher taxes and other high-risk items on the table. Making difficult decisions now gives both sides plenty of time before the next elections in 2014.

But the Medicare window won't be open long. If no agreement is reached in 2013, the next best change will come in 2017, when a new president comes to power. By then, of course, the system's finances would be even more out of whack than they are now.